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Why Marijuana Stocks Aren't Worth Your Money

Despite the potential for high growth, the legal weed industry isn't ready for investment.

Legalized marijuana has a lot of investors having visions of lots of green. With legalization sweeping across the states, it seems to be a great time to invest in marijuana stocks. Unfortunately, it's not.

Legalization spreading like a weed

In many respects, the budding marijuana industry is every bit as burgeoning as it seems. So far 30 states and the District of Columbia have passed laws legalizing marijuana in one form or another, and the vast majority of states allow for limited use of medical marijuana under certain circumstances.

Image source: Getty Images.

And legal weed is spreading into other industries too, most notably alcoholic beverages. Brewer and distiller Constellation Brands made a big splash when it announced an investment in the world's largest publicly traded cannabis company, Canopy Growth(NASDAQOTH:TWMJF), but Heineken's Lagunitas brand has been producing a limited edition ale called SuperCritical, which is made with aromatic oils of the cannabis plant, and Vermont's Long Trail Brewing made a limited run IPA-like beer made with cannabis compounds.

The Specialty Foods Association, however, says "cannabis cuisine" is one of the top 10 food trends to watch in 2018 while industry site Nation's Restaurant News predicts the use of cannabidiol (CBD) will find its way into food preparations this year in states where recreational marijuana is legal. Cannabidiol is one of the more than 100 chemical compounds secreted by cannabis flowers that are found in both cannabis and hemp plants.

Lost in a fog

So with the groundswell of supporting getting so high, why not invest in marijuana stocks? Because for all its advances, the industry is not yet ready for prime time, and there are a lot of companies simply glomming onto the trend. Just as lithium stocks became the investment du jour when electric cars were catching on, or rare earth minerals were all the rage after China limited their export, there will be a major shakeout that separates the wheat from chaff. Marijuana, because it's still in its infancy, still has a ways to go before that happens, and many marijuana stocks are sporting astronomical valuations based on little more than hype.

Meanwhile, marijuana remaining illegal at the federal level in the United States presents a major hurdle to businesses hoping to operate stateside. For example, although Canada-based Canopy Growth got a significant boost from Constellation's investment, don't expect the brewer to introduce a cannabis-infused product in the United States anytime soon. U.S. federal law has not yet caught up with public opinion on the matter, as evidenced recently by Attorney General Jeff Sessions rolling back Obama-era guidance for the federal government to allow states to enforce their own policies.

Many businesses are leery of having any association with marijuana, which makes financing and banking partiuclarly difficult. Many banks would rather refuse to service the industry altogether until the drug is legalized federally. Because of this, you will likely not see other large beverage companies, alcoholic or otherwise, making significant investments in the industry until federal law changes. Tobacco companies like Altria might be interested in turning to legal weed to bolster a declining cigarette industry, but it will also be leery of moving forward until the laws change.

Image source: Getty Images.

The hidden opportunity

I believe that rather than investing in marijuana stocks, per se, investors should be looking at those companies that are assisting the industry. Scotts Miracle-Gro(NYSE:SMG) may be one of the best "marijuana stocks" because its hydroponics business, which many commercial and individual growers rely upon, is growing by leaps and bounds. It will succeed regardless of which growers actually survive the shakeout to come. And, since hydroponics are only a small part of Scotts' business, the company is not nearly as vulnerable to regulatory issues as more pure play marijuana stocks.

The marijuana industry is an intriguing one because it does have deep and broad support in large swaths of the public's consciousness and is on the cusp of social acceptability. But it hasn't achieved that goal yet, and it is still too much on the periphery to make putting money into marijuana stocks a good investment.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.